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Wal-Mart Takes On Amazon.com -- and Itself

Although often seen from the outside as a stodgy, old-line type of department store, Wal-Mart (NYSE: WMT) has also been recognized for some time now as a technology leader in retailing. It was an early adopter of RFID tag technology, pushed for using universal barcodes as a labeling system, and also signed on at an early stage with electronic data interchange, or EDI, which is the transfer of documents electronically between the company and its suppliers, rather than using paper or fax.

Technology has also shaped its retailing policies, such as its early adoption of free ship-to-store policies for items ordered online and the blending of mobile communications with in-store shopping. For example, Wal-Mart has been testing the Scan & Go iPhone app that lets you scan and bag your purchases while shopping and simply scan a QR code at checkout to complete the purchase. Now you're able to access its entire online and in-store inventory from a smartphone or tablet, anywhere, anytime.

Although this move is a recognition that consumers don't care how they can buy a product as long as it can be done quickly, cheaply, and conveniently, it's really a response to inroads made by Amazon.com (NASDAQ: AMZN) into its retail domain, which has become the real competitive threat to Wal-Mart's position.

Its fiscal 2015 first-quarter earnings recorded their fifth straight quarterly decline in U.S. sales as store traffic fell for the sixth consecutive quarter. Wal-Mart's return on investment, which it views as a meaningful metric for investors scoring its ability to deploy assets, dropped below 17%, while its return on assets fell to almost 8%.

Source: Wal-Mart SEC filings.

Source: Wal-Mart SEC filings.

As difficult and worrisome as the quarter was for Wal-Mart, which it blamed in part on weather and cuts to government assistance programs (low-income consumers spend 18% of all food-stamp money at Wal-Mart), e-commerce remained a bright spot. At its namesake stores, e-commerce sales positively affected comp sales by approximately 0.3% and positively affected them by 0.2% at its Sam's Club warehouse stores.

Wal-Mart is responding to the challenges Amazon presents by pursuing the same sort of dynamic pricing policies its rival has adopted. Just a couple of years ago, Wal-Mart made hay with its mobile app that allowed customers to compare prices at its stores with those offered online and at competitors' sites, a move that forced Target to adopt and extend to year-round a price-matching guarantee.

Yet Wal-Mart ultimately saw that as offering no advantage for itself, so it began using big data analysis and pricing cropped from its rivals to change its own pricing on the fly. Rather than maintain the low prices every day that you find at its brick-and-mortar stores, the retailer's e-commerce platform deployed dynamic pricing to be a lower-price option, though it's probably led to some confusion for customers who find that Wal-Mart won't match its in-store prices to those they find on its website.

Still, that's allowed the retailer to surpass Amazon's growth rate last year. Whereas Wal-Mart's rival grew sales by 20% in 2013, it saw a 30% surge in sales. Amazon might be an order of magnitude larger than Wal-Mart, with some $68 billion in sales, but the retailer is proving it can hold its own in the online world.

And that's coming about because of its use of technology to eliminate "friction points," creating a seamless experience between online and offline shopping through whatever means the customer wants to access the company. As a result, some 20% of all items purchased online are being fulfilled at its stores.

We're not about to see Wal-Mart's supercenters disappear from the retailing landscape anytime soon, but we will see the retail king using technology to remake itself into an e-commerce giant able to take on all comers. As it has changed the face of physical retailing, it may prove itself to be a bigger competitor to the likes of Amazon.com -- and itself -- than many now give it credit for.

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Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.